Question

In a perfectly competitive industry, an increase in demand has the following effect on equiliobrium product price:

a)The increase in demand causes a shift upward in supply as more people want a product in short supply.

b)The increase in demand will cause price to decrease. The lower price will encourage additional consumers to buy the product, causing price to rise.

c)The increase in demand causes price to increase initially. With price above short-run minimum average cost, firms will make an economic profit causing more firms to enter the industry. As they enter, price will be driven back down to minimum average cost where economic profits are no longer made.

d)In a perfectly competitive industry, an increase in demand has no effect on short-run or long-run product price.

Answer 1

In the perfectly competitive market , an increase in the demand will cause a rightward shift in the maket demand curve and shift up the demand curve for the indiviudal firms. When the demand increases the price also increases, this cause the firms to earn positive economic profit in the short run. In the longrun a perfectly competitive firm only earns a zero economic profit , this is because the freedom entry exit allows more firms to come into the market and this would reduce the economic profit for the existing firms. The new firms will keep coming until the economic profits equals zero.

Ans: c)The increase in demand causes price to increase initially. With price above short-run minimum average cost, firms will make an economic profit causing more firms to enter the industry. As they enter, price will be driven back down to minimum average cost where economic profits are no longer made.